|Accounts Receivable and Finance Receivables
Accounts receivable is composed of the following:
|(In millions)||April 3,|
|Commercial||$||732 ||$||668 |
|U.S. Government contracts||184 ||155 |
|916 ||823 |
|Allowance for credit losses||(33)||(36)|
|Total accounts receivable, net||$||883 ||$||787 |
Finance receivables are presented in the following table:
|(In millions)||April 3,|
|Finance receivables||$||705 ||$||779 |
|Allowance for credit losses||(33)||(35)|
|Total finance receivables, net||$||672 ||$||744 |
Finance Receivable Portfolio Quality
We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan. These three categories are performing, watchlist and nonaccrual.
We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain. All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.
We measure delinquency based on the contractual payment terms of our finance receivables. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.
Since the first quarter of 2020, the Finance segment has worked with certain customers impacted by the pandemic to provide payment relief through loan modifications. The types of temporary payment relief we offered to these customers included delays in the timing of required principal payments, deferrals of interest payments and/or interest-only payments. For loan modifications that cover payment-relief periods in excess of six months, even if the loan was previously current, the loan is deemed a troubled debt restructuring and considered impaired. These impaired loans are classified as either nonaccrual or watchlist based on a review of the credit quality indicators as discussed above.
During the first quarter of 2021, we modified finance receivable contracts for 12 customers with an outstanding balance at April 3, 2021 totaling $29 million, of which $25 million was categorized as troubled debt restructurings. Due to the nature of these restructurings, the financial effects were not significant. We had four customer defaults related to finance receivables previously modified as a troubled debt restructuring that had an insignificant outstanding balance. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts.
Finance receivables categorized based on the credit quality indicators and by the delinquency aging category are summarized as follows:
|(Dollars in millions)||April 3,|
|Nonaccrual as a percentage of finance receivables||15.89%||11.94%|
|Current and less than 31 days past due||$||676||$||738|
|31-60 days past due||3||12|
|61-90 days past due||6||11|
|Over 90 days past due||20||18|
|60+ days contractual delinquency as a percentage of finance receivables||3.69%||3.72%|
At April 3, 2021, 27% of our performing finance receivables were originated since the beginning of 2020 and 33% were originated from 2017 to 2019. For finance receivables categorized as nonaccrual, 68% were originated from 2017 to 2019.
On a quarterly basis, we evaluate individual larger balance accounts for impairment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above. Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified. If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.
A summary of finance receivables and the allowance for credit losses, based on the results of our impairment evaluation, is provided below. The finance receivables included in this table specifically exclude leveraged leases in accordance with U.S. generally accepted accounting principles.
|(In millions)||April 3,|
|Finance receivables evaluated collectively||$||498 ||$||521 |
|Finance receivables evaluated individually||113 ||163 |
|Allowance for credit losses based on collective evaluation||26 ||28 |
|Allowance for credit losses based on individual evaluation||7 ||7 |
|Impaired finance receivables with specific allowance for losses||$||42 ||$||46 |
|Impaired finance receivables with no specific allowance for losses||71 ||117 |
|Unpaid principal balance of impaired finance receivables||122 ||175 |
|Allowance for credit losses on impaired finance receivables||7 ||7 |
|Average recorded investment of impaired finance receivables||138 ||126 |